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Evaluating The Case For Export Subsidies

  • Arvind Panagariya

    (University of Maryland)

Now that import-substitution policies have failed and been discredited, there has been a shift in favor of interventions on behalf of export interests. The author argues that close scrutiny reveals these arguments to be as flawed as the old arguments for import substitution. Among other things, the author concludes that: 1) Under perfect competition, a country trying to retaliate against a trading partner's export subsidies by instituting its own export subsidies, will only hurt itself. 2) The argument that export subsidies may be useful for neutralizing import tariffs, is spurious. In most practical situations, this is not possible. Removal of tariffs is a far superior policy. 3) In principle, a case can be made for protecting infant export industries in the presence of externalities. But the empirical relevance of externalities remains as illusory for export industries as it was for import-substituting industries. 4) Adverse selection and moral hazard can lead to the thinning of the market for credit insurance, but that is not a case for government intervention. 5) India's experience shows export subsidies to have little impact on exports. Brazil and Mexico's experience shows export subsidies to be a costly instrument of export diversification. 6) Those who argue that pro-export interventions were important in East Asia have not provided convincing evidence of a casual relationship between the interventions and growth.

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Paper provided by EconWPA in its series International Trade with number 0309008.

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Date of creation: 02 Sep 2003
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Handle: RePEc:wpa:wuwpit:0309008
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  1. Richard Arnott & Joseph Stiglitz, 1986. "The Welfare Economics of Moral Hazard," Working Papers 635, Queen's University, Department of Economics.
  2. Fitzgerald, Bruce & Monson, Terry, 1989. "Preferential Credit and Insurance as Means to Promote Exports," World Bank Research Observer, World Bank Group, vol. 4(1), pages 89-114, January.
  3. Tybout, James, 1998. "Manufacuring firms in developing countries - how well do they do, and why?," Policy Research Working Paper Series 1965, The World Bank.
  4. Nogues, Julio, 1989. "Latin America's experience with export subsidies," Policy Research Working Paper Series 182, The World Bank.
  5. Bhagwati, Jagdish N, 1988. "Export-Promoting Trade Strategy: Issues and Evidence," World Bank Research Observer, World Bank Group, vol. 3(1), pages 27-57, January.
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